HSBC to face investor opposition over pay and sub-prime exposure

HSBC faces a showdown with investors over boardroom pay and its exposure to the sub-prime mortgage crisis this week when its fiercest critics from the activist investment firm Knight Vinke attend the bank's annual meeting.

The UK's biggest bank risks becoming the next major company to face a rebellion over pay policies after the revolts endured by the pharmaceutical company GlaxoSmithKline and the oil group Shell last week.

HSBC's pay schemes, which reportedly could pay out as much as £120m to bosses, are criticised for being too generous and too lenient in terms of performance demanded from directors, who could get up to seven times their salary in bonuses if targets are met.

PIRC, an advisory body that has clients with £1.5bn of assets, is recommending voting against the remuneration report, while the Association of British Insurers' has issued an "amber-top" warning (its second most severe) to alert its members to its concerns about the scheme.

Investors at Friday's annual meeting are being asked to vote on two pay-related matters. The first is a straightforward vote on the remuneration report and the second proposes changes to an existing pay plan. This gives investors two potential avenues to demonstrate their disapproval.

The Monaco-based Knight Vinke has yet to decide how to vote on the resolutions but is promising to attend the annual meeting in London after raising a number of concerns about HSBC's strategy in the past year. Glen Suarez of Knight Vinke has not yet decided on a question to pose publicly to the board but he said: "We don't like the pay scheme very much."

Knight Vinke has a range of criticisms of HSBC, largely focusing on exposure to the US sub-prime mortgage crisis. It believes the bank should walk away from its troubled HSBC Finance operations in the US and argues that the bank's assets are overvalued because they have been affected by the credit crunch - proposals both strenuously disputed by the bank.

HSBC said: "Knight Vinke's suggestion that there is something unusual about HSBC's accounting for its US sub-prime mortgage book is simply entirely wrong." Walking away from the US business would be "irresponsible and unrealistic".

The votes should give a clearer indication of the views of the bank's shareholders towards the management, who until recently had managed to escape rows over executive pay. However, that changed with the acquisition of Household International - now part of HSBC Finance - and the £37m pay deal for William Aldinger in 2003.

One major shareholder said the vote at HSBC was finely balanced. The body that advises the National Association of Pension Funds, for instance, is recommending supporting the pay plans.

PIRC is advising voting against the remuneration report and the amended pay plan. "PIRC also considers that along with other performance-related pay the scheme is excessive," it said. "In light of this excessiveness and the fact that the majority of performance conditions are not stretching, we recommend opposition to the proposed amendments."

HSBC is defending the pay schemes. "We think the targets are stretching and that they are certainly stretching when compared to how the bank and the banking industry will be."

The bank argues that the pay of chief executive Michael Geoghegan would still be outside the top 10 of financial services companies globally, even though the bank was the world's most profitable last year with a profit before tax of $24bn (£12bn).